It's The Supply Chain, Stupid: Why Inflation is Rising

Milly Flynn

Bitcoin & Crypto

22 mins

Oct 01, 2022 00:33

There are several theories proposed by different groups of economists and others to explain rising prices, or "inflation." But one theory - "It's The Supply Chain, Stupid" - dominates.

There are a variety of theories proposed by different groups of economists to explain rising prices, or "inflation." Broadly speaking, there are five main theories, with two additional subsidiary theories. Each theory has its own merits and drawbacks, and no single theory is universally accepted. However, understanding the different theories can help us better understand the complex phenomenon of inflation.

1. The current monetary policy of central banks around the world is effectively driving up prices by devaluing their respective currencies. This relative value decrease means that more money is required to purchase goods and services, driving up inflation. In the long run, this could lead to serious economic problems and could erode the value of people's savings.
2. I believe that corporate greed is a huge problem in our society. Companies are exploiting the public by squeezing higher profits and driving prices up. This is causing a lot of hardship for families and individuals who are struggling to make ends meet.
3. If the public believes that prices will rise, this can actually cause prices to increase. This is due to the psychological phenomenon known as inflation expectations. When people expect prices to go up, they are more likely to buy items sooner rather than later. This increased demand can cause prices to actually rise.
4. The economy is facing supply constraints as bottlenecks create shortages of key goods. This is driving up prices and causing hardship for businesses and consumers alike. The government must take action to address these issues and ease the pressure on the economy.
5. The economy is "too hot" when demand is too high and prices are rising as a result. This can be caused by a variety of factors, including [these are the subsidiary theories].

• I believe that loose fiscal policies are not good for the economy. They tend to give consumers too much "extra" cash to spend, which can lead to inflation.
• I believe that wage increases driven by workers' demands for excessive compensation are ultimately harmful to both workers and businesses. While workers may initially benefit from these increases, businesses will eventually be forced to either raise prices or cut costs in order to stay profitable.

These theories represent distinct and comprehensive worldviews, expressed in broad economic philosophies and partisan political platforms. They provide a way to understand and predict the behavior of individuals, businesses, and governments. They are useful tools for solving problems and making decisions.

Different theories about the world can lead to very different and often incompatible policies. This is why it is so important to ask which explanation, or worldview, is correct. Finding the answer is not easy, as it requires a full understanding of the complexities of the problem. But two general points can help us to see the difficulty of the task: first, that different theories can lead to different and often incompatible policies; and second, that a full understanding of the problem is necessary to find the correct answer.

• Inflation can be a complicated phenomenon with multiple causes. Prices can rise for a variety of reasons, and several factors may be at play at any given time. While inflation can be a challenge for consumers and businesses alike, it is also a natural part of an economy. By understanding the causes of inflation, we can be better prepared to manage its effects.
• There are many different types of inflation, and not all of them are bad. Inflation can be caused by different types of stress in the economy, and not all of these should be treated equally by public policy.

In the present moment, it is essential for policy-makers and investors to identify which of the underlying economic factors - supply, demand, the money supply, or psychology - is likely to have the most influence on financial markets. This will help guide decision-making in the short-term and ensure that the correct actions are taken to maintain stability and promote growth.

The Federal Reserve appears to be following a prevailing fashion in economics right now by deciding that the psychological explanation carries the greater weight. Fed officials have resorted to tough talk and performative interest rate rises in an attempt to knock down our inflationary expectations going forward.

There is a growing consensus among economists that more needs to be done to combat the coronavirus pandemic. One proposal that is gaining traction is to deliberately raise the unemployment rate in order to reduce demand and help contain the virus. While this may seem like a counterintuitive approach, the thinking is that it would be less damaging in the long run than the current strategy of trying to prop up the economy with stimulus measures. With unemployment already high, the thinking is that raising it even further may not have as severe an impact as one might fear.

• We need to get unemployment down to 5 percent or below to contain inflation, according to Summers. This means we need two years of 7.5 percent unemployment or five years of 6 percent unemployment or one year of 10 percent unemployment.

This is outrageous! How can anyone think that it is necessary to inflict actual economic pain on millions of people in order to land the economy? This is not what a "hard landing" means.

The policy in question is an explicitly nasty one, and invoking the name of Paul Volcker – who famously broke the back of inflation 40 years ago – is meant to lend it an air of legitimacy. However, Larry Summers is more than happy to claim credit for this grim insight, and he is far from being a Saint.

The recommendation in this paragraph is both obscene and wrong. It is disgraceful that such a recommendation would be made, and it is even more disgraceful that it is wrong. This is a black mark on whatever organization made this recommendation, and whoever was responsible for it should be ashamed.

The supply chain is the key to success in today's economy.

There is no denying that the world economy has been dealt a major blow by three unprecedented external shocks over the past two years. While the headlines may be alarming, it is important to step back and take a closer look at the situation. The true impact of these shocks will likely be felt for years to come, but with proper planning and execution, the global economy can slowly begin to recover.

• It's hard to believe that it has been less than a year since the outbreak of Covid-19, the worst global pandemic in 100 years.
• The Invasion of Ukraine is a tragic event that has plunged the country into a state of turmoil. This war has claimed the lives of thousands of innocent people and has left many more homeless and displaced. It is a human tragedy of epic proportions.
• The monetary stimulus on a massive scale is unprecedented since World War II. It is a great vision that will help the economy recover and grow.

The economy is in a state of flux, with seemingly everything in flux. The stock market is crashing, interest rates are rising, and inflation is rising. This is causing a lot of disruptions in the economy, and it's hard to know what will happen next.

Looking at the chart of Personal Consumption, it is clear that Demand is strong. This bodes well for the economy, as businesses will likely see increased activity and consumers will have more money to spend. The future looks bright for both businesses and consumers alike.

The Crude Oil chart is a great way to keep track of the price of oil. It is also a good way to see how the oil market is doing.

The money supply (M2) is an important economic indicator that measures the amount of money in circulation.

The government's spending habits are often under scrutiny, and for good reason. With tax dollars comes great responsibility, and it's important that the government is efficient and effective with its spending.

The Big Picture is a carnage of dislocation. All the normal trends and relationships are broken. Beginning one fine day in March 2016, Consumer Demand shifted violently down, then violently up, and always and especially "sideways"– i.e., consumers, in lockdown, or working remotely, unable to pursue many normal activities, or simply becoming cautious as the pandemic spread uncertainty everywhere, altered their buying patterns dramatically. As has been widely noted, there was a major displacement of spending away from the consumption of services, and in favor of the consumption of goods (durable and nondurable).

It is clear that the COVID-19 pandemic has had a significant impact on consumer spending habits. In the short term, we have seen a shift away from spending on services and towards spending on goods. This is likely due to a combination of factors, including increased uncertainty and a desire to save money.

What all this amounts to is a recipe for putting the supply chains that serve our economy under extreme, but temporary stress. This could lead to shortages of certain goods, and higher prices for consumers. However, it is important to remember that these disruptions will be temporary, and that the economy will eventually adjust and return to normal.

As our economy continues to evolve, we are seeing a shift from a focus on services to a focus on goods. This change has a number of implications for businesses and consumers alike.

As the world increasingly moves online, many services that were once performed in physical locations are now being performed virtually. This shift has made it easier for people to access services from anywhere in the world and has made many previously local businesses global. While there are some services that can only be performed in person, such as healthcare or restaurants, many others, like banking and streaming media, have migrated online. This trend is likely to continue as more and more businesses move to take advantage of the global market.

The United States is facing an unprecedented challenge with the outbreak of the coronavirus. In response, the government is injecting a trillion dollars of stimulus into the economy. This will have a ripple effect on supply chains as businesses scramble to meet the increased demand for goods. Small glitches in the supply chain can have a big impact, as we have seen with the shortages of certain items in stores. The government is working to avoid these pitfalls and keep the economy moving.

The pandemic has had a severe impact on the flow of information between customers and manufacturers. The initial shock of the pandemic caused many car companies to cut back on orders, assuming that the auto industry was about to enter a recession. However, when consumer demand quickly surged above pre-pandemic levels, the automakers were unable to restock the parts they had canceled. The drastic losses in revenue they suffered have been well documented.

The sheer complexity of modern supply chains is a major challenge. Physical supply chains have become enormously complex, with thousands of critical or near-critical suppliers spread across the globe. The semiconductor industry is a prime example, with a vast ecosystem that includes tens of thousands of suppliers. A recent White House report underscores the daunting complexity of the supply network that underlies the digital economy.

• The semiconductor industry is becoming increasingly globalized, with supply chains spanning across multiple countries. This presents both challenges and opportunities for the industry. On the one hand, managing such complex supply chains is a daunting task. On the other hand, this globalization presents an opportunity to tap into new markets and talent pools. The industry will need to adapt and innovate in order to remain competitive in this ever-changing landscape.

The science of modern logistics management has squeezed the margin of safety out of the system in pursuit of mere efficiency. All across the manufacturing world, traditional "shock absorbers" have been stripped down to bare minimum levels. This leaves the system vulnerable to shocks and disruptions, which could have serious consequences.

It is clear that the global economy is facing a major crisis, which is reflected in the recent price trends. The New York Federal Reserve has developed a measure of supply chain stress, which has exploded in recent months. This is a clear indicator of the severity of the situation and the potential for further economic disruption in the coming months.

Inflation is primarily caused by supply constraints. Today, these constraints are limiting the supply of goods and services, causing prices to rise. This inflationary pressure is likely to continue in the short term, as businesses struggle to keep up with demand.

Looking at the current data, it appears that inflation is not being driven by any sort of permanent "excess demand." Rather, it seems that stimulus checks are being spent and driving up prices in the short term. However, once those checks are gone, it's unlikely that inflation will continue at the same pace. This is further supported by the fact that the money supply has fallen back to below-average levels.

• There is no simple answer to the question of whether aggressive money supply expansion is the right response to the pandemic crisis. On one hand, such a policy could help to stabilize the economy and prevent a further deterioration in economic conditions. On the other hand, there is a risk that too much money could be created, leading to inflationary pressures down the road.
• It is widely accepted that there is a lag between the money supply expansion, or now, its return to normal levels, and the effect on prices.

Whatever the merits of the expansive policies in 2020, it is clear that the growth of M2 has been declining rapidly for at least 18 months. This means that the policies are approaching the point where they should begin to have a deflationary effect.

There are concerns that the Fed's reliance on the Expectations theory of inflation may be misplaced. The theory posits that people's expectations of future inflation are the key driver of price instability. However, available measures of inflation expectations do not appear to show the level of public concern about future inflation that the theory would predict. This raises questions about the viability of the Expectations theory as a guide for monetary policy.

There is no doubt that corporate greed exists and that it is a problem. However, the notion that it is the primary driver of climate change is not supported by the facts. While it may be a contributing factor, other factors are likely to be more significant. This does not diminish the need to address corporate greed, but it does suggest that other factors are likely to be more important in the fight against climate change.

Good News and Bad News

"It's the Supply Chain" – has become the answer to everything, it seems. But it really is the answer to the question of what is driving “inflation” right now. Supply chain stress comes in many forms – shortages, bottlenecks, dislocations geopolitical (Ukraine), medical (China’s Covid-Zero policy and the shutdowns), and more pedestrian cases, like – These supply chain stresses are all having an impact on inflation, and it's only going to get worse in the coming months. So if you're wondering why prices are rising, just remember – it's the supply chain.

• It's hard to believe that one of the world's most iconic companies has run out of trademarks, but that's apparently the case for Ford. According to reports, their supplier is unable to deliver the necessary number of blue emblems for the F-150 trucks. While Ford is exploring alternatives like laser etching or retrofitting the trucks when the badges become available, it's doubtful that many people will buy the car without the Ford badge. For many, the badge is synonymous with the brand itself. With all of the supply chain issues we're currently facing, it's not surprising that this is the case. It just goes to show that even the most legendary companies can be brought down by the smallest of things.

Ford's latest supply chain snarl is not enough blue oval badges

• Looking at the current state of the automotive industry, it's no surprise that Ford is facing some inventory issues. With parts shortages being a major problem, Ford is stuck with around 40,000 to 45,000 unshipped vehicles. This is particularly troublesome because many of these vehicles are high-margin trucks and SUVs. Looking ahead, it's crucial that Ford finds a way to overcome these parts shortages. Otherwise, they'll continue to lose out on potential sales and profits. Hopefully, Ford will be able to get things back on track soon and avoid any further disruptions to their business.

Looking at the current situation, it is clear that supply constraints are temporary and will eventually be resolved. businesses and consumers will adapt and find ways to work around the issues. The market mechanism is still functioning, even if it is imperfect. The shocks suffered in the last two years have been severe, but the supply chains are beginning to clear. This is good news for the future.

It is disappointing to see that policy makers have panicked in response to the current situation. I had hoped that Jerome Powell would have the courage to stand up to the pressure to "do something" and allow the system to fix itself. However, it seems that the idea of "performative monetary policy" has won out. This approach, which involves taking measures that everyone knows will not actually improve the situation, may cause serious economic damage. I can only hope that the policy makers will reconsider their approach before it is too late.

• It is often the case that those who claim to be practical and free from intellectual influences are actually slaves to the ideas of dead economists. Madmen in positions of authority who hear voices in the air are usually distilling their frenzy from some academic scribbler from a few years ago.